Loan moratorium: Centre asks banks to foot 'interest on interest' bill

Illustration by Binay Sinha
The Union finance ministry has informally told banks to reimburse or adjust the compound interest they charged customers in line with the Sup­reme Court’s order asking them to refund “interest on interest” collected from acco­unts that sought a moratorium.


Banks have been told that they can also adjust the amount against future liabilities for all accounts, irrespective of whether they opted for the moratorium or not, similar to the scheme the government announced for loans up to Rs 2 crore, said an official aware of the development.


However, banks are thinking of making a representation to both the Reserve Bank of India (RBI) and the Centre through the Indian Banks’ Association (IBA). The IBA approached the government last month asking it to enh­ance the scope of the scheme for ex-gratia payment of the difference between compo­und interest and simple interest, to cover the additional refund arising out of the Sup­reme Court’s order. The government hasn’t shown any inclination to compensate ba­nks for the compound inte­rest waiver, estimated at aro­und Rs 8,000 crore, the official said.


Of this Rs 8,000 crore, private banks’ share is about 37 per cent and that of public sector banks around 60 per cent, said Anil Gupta, vice president and sector head – financial sector ratings at ICRA. The banks have to adjust the penal interest in the next installment in April.


The lenders have also asked the IBA to approach the Department of Financial Services as their balance sheets are stretched. The Supreme Court on March 23 ruled that banks cannot charge interest on interest for accounts that sought a moratorium last year and the amount so collected must be refunded in the next installment of the loan account.


Last month, Business Standard had reported that the government may not foot the Rs 8,000-crore reimbursement bill. It felt it could not bear the extra burden as it had already announced a relief measure for loans up to Rs 2 crore. Besides, the onus of reimbursing customers does not fall entirely on it, according to the apex court’s order.


In October 2020, the government had announced a scheme to waive compound interest for loans below Rs 2 crore, that included education, housing, auto, consumer durable loans, loans advanced to micro, small, and medium enterprises, and credit card dues.

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